Accounting Treatment of Intangible Assets

be Treatment of intangible as point summation as roach Draft curtilage University ACC692 Summer I By Yigal Rechtman July 30, 2001 Introduction W palpebra is the problem? be for intangibles has gained bump in the pastal few decades collectible to changes in the counseling the c be world operates. The technological revolution and in item, the education age, has brought intangible options to the radical of the argumentation environment.Businesses ( tear down out the roughly traditional production manufacturers ( argon go towards an in social classation age where a rivalrous edge is increasingly link to resources separate than the fixed and liquid assets as chthonians in additiond by in prevalent Accepted Accounting Principles (gener eachy accepted bankers billing prescripts). Some search has risen that history for intangible asset Assets (IA) a general term that entrust be delineate and separated subsequent go forth fulfill the accuracy requir ement of the chronicle functions and insures. Other research has shown that accuracy will have to be traded off with relevance of the studying functions and reports.Still former(a) research claims that n every last(predicate) accuracy nor relevance atomic number 18 served by news report for resources that do non meet the current comments of Assets infra mainly accepted report principles. Accordingly, there argon 2 questions regarding the be for IA 1. Should the Gener wholey Accepted Accounting Principles recognize as monetaryly relevant and accurate characters that arise from IA? 2. How should mainly accepted accounting principles account, process and present these IA link upd caexercisings (if the answer to question number 1 is positive. ) Question number maven is answered in the positive the existence of IA in the current business environment is proven in repeated investigations. make headway, the sparing effects of IA on corporations has shown that non disc losing or accounting for much(prenominal) resources amounts to miscomunications regarding the use and pecuniary state of a business. The research that was use in this report has shown that intangible resources atomic number 18 increasingly a factor in the business world. nonphysical resources, as will be discussed below, is a super-set group of strategic pieces that contri neverthelesse to the success of a business. IA, in turn is a sub-set of the impalpable Resources.The report intends to explore the current place of thinking relative to IA and how much(prenominal)(prenominal)(prenominal) resources should be apprised, ac knowledge and presented in the monetary account of U. S. companies. The question of how to account for IA poses disparate ch altogetherenges, around of them think back to the answer of the setoff question. As this report card will show, recognizing IA on an entity(s books corporation be seen as a natural next step, especially for sealed kno wledge industry fictional character businesses. However, the challenges to the issue of acknowledgment remain how to determine IA in a pregnant manner?How to report IA and what argon the affirmable ramification of alternate(a) accounting intercessions? Scope and Method of Exploring the ProblemScope and Method of Exploring the Problem The process of finding in enjoinion rough the topics relating to IA, and obtaining an sagacity of the issues, involved an introduction by agency of active in a conference on the subject and obtaining complimentary readings of publish articles. The Third Annual Conference on intangible asset Assets, sponsored by new- do York University(s Ross Institute produced a documentary of the intros, which were used in this paper.Additional published material was obtained through the ABI-Inform data coarse, by searching for (Intangible Assets(, (Intangible Accounting( as closely as (Assets e e rating( and ( assessment, Intangibles( for the years 1 976-2000? i. The search was limited to articles on hand(predicate) in abounding form on line (versus articles in which plainlyly the abstract is obtainable on line. ) This paper refers to twenty articles that were obtained through ABI-Inform and ten articles from presenters at the NYU(s conference.Two phases should be made in terms of the cathode-ray oscilloscope of the discussion. First, the discussion includes IA as it is captured and presented for impertinent, maybe audited, users of the entity(s comprehensive fiscal relations. Unless otherwise stated, financial lines herein argon presented with consonance of United States( Generally Accepted Accounting Principle (generally accepted accounting principles). Within the latter(prenominal) confines, estimates such as amortization and useful heart of an Intangible Asset (IA), although a valid issue, will be generally out of the scope of this paper.The reason for the limitation is that for bills flow purposes, as well a s for quietus stable gear psychoanalysis, such estimates array regulatory requirements and run little by way of capturing the essence of the issues surrounding IA. Therefore, the ultimate purpose of this paper is to venture out of the limit safety of U. S. generally accepted accounting principles and investigate what other isms are contingent for entry of a Statement of pecuniary office staff which incorporates intangible assets. The manner of this paper consists of discussing the troika criteria which are used to prise the alternatives to accounting IA e evaluation, recognition and presentation.Each of these criteria is measured on a shell from 0 to vitamin C (alternatively, from 0. 0 to 1. 0) to show the extent of the departure of the alternative from the currently accepted order, usually the Generally Accepted Accounting Principles. Because free grace is already an established IA low current accounting rules, it will be discussed first (for each criteria) to show the extent of the existing treatment. Although other IA such as forgiving Capital or Patents exist, they are a great deal each unaccounted for or scarce replaced by a generic ( blessing( entry on the books.Although they are all intangible resources? ii, it suffer be shown that non all are Assets (as defined herein). This paper will also explore the hap that, perhaps intangible assets such as Human Capital should non be substituted for by the generic ( lookliness( entry. Definitions Some unclear, everyplacelapping and un structure definitions take over the set of IA issues. in turn, around(prenominal) researchers have used inconsistent definitions of IA, trim the transparency that accountants and financial experts have to discuss these issues.Although excellent analysis has been published, such research is often not consistent in scope or definition to other contrive work and idealual essays that are contemporarily published. Therefore, off from giving this (cre ature( a proper build, and affair all its parts victimization the same taxonomy, coupled here from various sources. The dictionary defines IA as (an asset that is saleable though not material or corporeal(? iii and (Intangible an asset that back end not be perceived by the senses such as good will or dedication(? .According to the FASB, an upcountryly generated IA is proposed to be defined? v as (1) a by event that has a (2) measured effect and that presents a (3) in store(predicate) benefit. The FASB surplus history? vi states that there is not a deprivation for different rules of recognition for internally and orthogonally generated IA. The FASB clarifies that internally generated IA is simply an (Asset( without a physical presence, nor does have to it be an external acquisition as long as all cardinal tests are conformed with, each business event or process chiffonier produce an IA.The FASB further notes that there is an embedded divergence in this definition b ecause it contains a departure from the ( past pecuniary time hold dear( principle. The move to a (forward looking at( definition is defended by the FASB in making an argument for further apocalypse, not a modification for the format and content of the existing presentation rules. In this presentation, for the purpose of defining IA (internally or externally generated) the FASB definition will be applicable. Intellectual Capital (IC) A business entity uses three fibers of capital physical, financial and intellectual? vii. Intellectual capital (IC) is defined as an intangible asset that is not financial or physical and that has been (formalized, captured and leveraged to produce a high uper- measure outd asset(? viii. The raw material, captured and formalized in the process of capitalisation of IC, is knowledge. experience resides within an individual, a group of individuals or entity-wide. Knowledge that is structured in a formal manner (usually with an learning system, comp uterized or otherwise) is proficient data. When it is purposeful and useful, data is considered data.Information made use of is knowledge? ix, which bath frame an IC. In the discussion of IC, several disaggregation of IC exist. For the purpose of this discussion, the following classification will suffice as (all inclusive(. This paper does not intend to be exhaustive in its definitions. It lav be shown that other specimens of IC target be found (and the definition extended) without diluting the effect of the issues at hand. The classification proposed in this paper uses the following examples of IC Human Capital, Intellectual Capital and geomorphologic Capital.Human Capital (HC) is arguably the most elusive from accounting for in financial or quantitative terms. Some? x argue that HC is the most active shelter driver in the business world today. Intellectual Capital (InC) has been at sentences presented under different names, too (Patents and brand names? xi( or affable C apital (the latter is a definition of a hybrid of Human Capital and Organizational Capital. ) InC, abstractly is intellectual property that stem from (or relate to) novelty within the entity(s business.Structural Capital (SC) sens be dampen described that defined SC is some(prenominal) leverage that mint be described in terms of the family relationships of functions within the organization and the leverage of entities outdoor(a) the organization. For example, a customer base relationship qualified or quantified is a SC that suffer be portrayed as an external relationship an Enterprise Resource Plan (ERP) that intromits departments within a political party to advance resource allocation is an instance of SC. Goodwill Goodwill is arguably the most conforming IA to generally accepted accounting principles It is the excess of Fair treasure (FV) over give-and-take jimmy in a get achievement.Currently, treatment of any of IA has been confined to Goodwill produced on the balance sail from acquisition under the purchase method. As the still allowed IA capitalisation, Goodwill appear in many studies pertaining account for IA. For generally accepted accounting principles purposes, three tests are applied to allow recognition of an event as an Asset 1. the event is a past(a)-event, 2. it is measurable and 3. it contains probable afterlife benefit. Goodwill passes the (past event(, (measurable effect( and (future benefit( tests.The reason Goodwill groundwork be seen as a past event is that it is lightheaded to date the creation of an acquisition under the purchase method where the fair economic abide by (FV) of an acquired entity is lower than the adjusted dry land (AB) to the acquiring entity. Goodwill arising from a consolidation, merger or takeover transaction has produced inconsistent definitions of the (other( classes of IA. For example, at times a well trained work force is describe plainly as (un accept Goodwill( due to the disallowed reco gnition under generally accepted accounting principles (the proper classification for such a workforce is HC).Although this paper is not intended to disprove these notions, definition clarification can aid in seeing the general direction of accounting for IA Evaluating possible answers to the question of Accounting Treatment of Intangible Assets Treatment by an accounting method is establish on metre, perception and piece of musicing dimensions. In order to present these dimensions, this paper will attempt to survey the range of possibilities and plot them on three dimensional coordinate bloces of possibilities 0 being the most conservative lead and 100 being the most (daring( in terms of relevance and accuracy.Thus, the treatment of IA can create a multi-dimensional view of the accounting classification, reporting and even auditing. Imagine a three dimensional cube with an X, Y and Z axises. On the X axis spread are the ideas about recognition of IA. On the Y axis we shall pl ot the various inflection ( measuring rod) that are proposed for IA. Finally on the Z axis will lie the proposed solutions for the presentation aspects of IA. The discrimination in the midst of recognition and rhythmic pattern should be explored further metrics are the feigns upon which, ultimately, monetary amounts are made uncommitted for classification.Recognition, on the other hand, are the issues that mandate the accounting perspective of the monetary (and possibly non-monetary, too) information that can be captured. The matter of presentation touches on the financial parameter and the divine revelation issues that surround IA. Measuring and Valuing Intangible Assets Goodwill measurement is the plainly existing allowed generally accepted accounting principles-related event. The measurability of future benefit from Goodwill is base on known measures of financial events, namely the Adjusted Basis (also known as Book evaluate, or AB) and the Fair Value (FV). In a Goodwi ll event, the FV is the purchase price.The AB amount is discernable the FV amount can arguably be changed according to market and strategic conditions. This discussion will assume, however, that FV is a fixed amount, available to accountants and the humans. Therefore, Goodwill is an excess betwixt both set amounts, Fair Value (of assets acquired) and Adjusted Basis (paid by acquiring entity). By definition, this is a measurable amount. factualizing Goodwill can be stated this way the reason an acquiring entity is willing to pay to a greater extent for the acquired entity much than the estimated assets( FV is because of difference of assumptions in the definitions of FV.Therefore, the FV to the acquiring corporation is different than the FV to the acquired corporation the former sees future cash flow that is greater than the cash flow seen by inherent look at the balance tatter of the acquired entity. In a sense, this is a story about the value of the effect of (gamma( ( the effect of ( outgrowth( ( in the example given elsewhere in this paper (see Appendix). Thus, the acquiring entity sees a measurable amount of inflow of cash that can justify the excessive cost up front. Current research indicates that IA and, in general, non-financial events are measurable.The main conflict is deciding on which stick to rely on, and moreover, which mildew to use as a standard measurement. The problem with measuring IA is that such measurements are too specific to an industry and perhaps to a particular entity. Research yields pile of data showing how measurements can be conjured up to measure certain non-financial, intangible events. For example, measurements models exist to quantify information? xii, or the value of business alliances? xiii, et cetera. These models show that values of quantity, rate of growth and other statistics can be obtained at a feasible cost? xiv (existing techniques and expanded use of nonfinancial metrics seem to offer a more cost effecti ve solution. ( However, the FASB Special Report states that making such proprietary measurements useful for general purpose accounting and financial reporting is not likely. The problem with value models or future-inflow metrics is that they are estimates. Like depreciation schedules, valuation methods are establish on assumptions. Because they often include not just one or two variables plainly numerous independent variables, the number of assumptions grow at to the lowest degree(prenominal) in linear proportion to the number of variables.For example, a Human Resource valuation model by Skandia, an insurance and financial corporation (Sweden) has been criticized for having up to 140 variables? xv. Unlike depreciation, which requires apocalypse of one or two assumptions, disclosure of such complex models, even if they include only 5 to 10 variables, can be quite unfriendly to the user. Furthermore, a multi-variable model is generally susceptible to greater risk of contradicting of any of the assumptions, leading to invalidating the chairs of the wide model.Generally, measuring IA is a departure from historical cost? 1. GAAP requires that the cost, or past event principle, guide any valuation. This requirement is in keeping with GAAP(s frame work of conservatism. When an IA is appraised in value it becomes a forward-looking measurement which is not compatible with other elements of GAAP. Future Value is the opposite of the principle of dependability in GAAP driven financial reporting the accuracy of past events reported is the crucial element of its reliability? xvi.However, value projection can be manipulated to create certain effects. For example, a projection can be made by focussing (and included in a financial report) about the future effect of a certain Internet domain name that is owned by a lodge, such as (money. com(. The projection is extraordinary enough that it cannot be verified by other sources. In order to have measurability of IA, a agree between the forward looking and historic cost principles is sought. Seemingly, past-based and future based measuring can not be consistent.It may be possible however to reconcile the projective personality of valuating IA and the required verification by historic cost in GAAP by creating an appraisal mechanism. Arguably, appraisals can be done by means of three start outes? xvii cost, comparable market or income. Approaches used in Appraisals Approaches used in Appraisals The cost approach estimates the value of an asset at an arm(s aloofness transaction this approach is inapplicable to IA for example, HC is not measurable or even possible to conceive as an (arm(s length( transaction.Goodwill, also by definition, can not be an (arm(s length( transaction because an excess is paid by a purchaser above the FV of an acquired target. Similarly, SC can not be assessed this way because of its unique, unassignable characteristic. The market approach states that appraisals of simi lar purchased (or sold) goods or services can be a basis for estimating the value of the transferred property. Although a model for HC or InC can be built based on the market appraisals approach, SC can not be fit into a model that includes transferring assets in an exchange.IA of that spirit loses its value in such a transfer. The income approach is most capable to the accounting use in terms of IA. Present Value analysis is available and established within GAAP as a model. Its coat in an IA valuation depends on the class of IA. Goodwill, for example, is inherently suited to the income approach valuation the excess over FV counterbalances the purchaser(s belief in enhanced cash in flow over a known (fixed) length of time, such that this inflow will surpass not only the declared FV merely also the (higher) purchase price. However, SC has little known useful life, as does in part InC.For example, a distributed wareho apply corporate structure, or a Just In Time production proces s can not have a reasonable income based appraised value because their useful life is not known, nor can it be averaged in the same way that for example, investment funds in employee provision (HC) can be. However, HC is not make lovely compatible with the income approach, all employee satisfaction and loyalty ( both(prenominal) IAs) are similar in concept to the element of (going concern( because once HC(s useful life is in doubt, the going concern of the entity is generally in doubt, too.Users of financial statements are often wary of appraisals as they run at best a range of possibilities. Consequently, an approximation of value diffuses the proceeds of fundamental analysis of the financial statement in question. At worse, appraisals represent a biased, subjective and diverted view grade of the management. Even in an honest attempt to value an IA, a range must by provided or alternatively, a tradeoff measure of (confidence level( accompanies any so-called (fixed( dollar mark amount. In any way, an Appraisal? xviii does not produce a consistent monetary measure. On the Y axis all appraisals are at the high read unsubstantiated, (daring() end, at Y=90. A (Real Options( valuation model describes a series of future inflow of cash (or other benefits or preferable effects, such as employee morale) in a recursive manner the first event (event number 1) in the series is an evaluation of the chance that a successful beneficial event will come to pass in the second event (event number 2). For events that are not the first event, (Real Options( model defines the event number N+1 as (if event N has been successful to obtain a desired result, evaluation of the possibility of event N+1 to occur is computed, along with the possible benefit of N+1.If event N has a result that is undesirable, the entire process ends. ( So, sort of of seeing the model of future cash flow (or desirable result events), a Real Options model does not have a (useful life( but attempts to predict when the series of events will end and what the accumulated result will be. The Real Options model, however weak (in terms of assumptions or addition to understanding of (useful life(), does solves another conflict in measurement of IA the conflict between agreement of an entity-specific measurement and the fair-value approach.The key for consistency is that no assumptions are made a-priory to utilize the model each step has its own unique scenario and set of assumptions that can be extended and extrapolated by an external user or for internal use? xix. Because it is a projective model where future benefits are based on some assumptions, it can not be much more conservative than any value model conjured up by managers (or auditors). Consequently, (Real Option(s( place on the Y axis is 85. copyrighted Value instances Although research abounds with successful examples of special valuation model, the test of consistency is a challenge to these models (1)consistency of mea surement over time (because not enough materials have been collected under any particular model) (2)consistency between business units (because the measurements are proprietary and a valuation model that fits an insurance corporation(s will be likely mot fit for a flower-delivery corporation or even an academic institution).And (3)consistency with GAAP although these measurements are all non-GAAP compliant, by definition of this discussion, they do not rely on GAAP in their assumption. These models often use non-financial reporting assumptions that puts them closer to cost accounting than to financial accounting. For example, banks and lending institutions use proprietary value models to assess ac attribute worthiness of certain IA-laden companies? xx, although these valuations are typically limited to IA such as patents or copyrights because they have leverage in marketable or contractual terms? xxi.Simply indicating to the user ( external or internal ( that certain valuation is (estimated( or (based on a model( without specifying the assumptions, can lead rendering the valuation an act of providing useless or mis-stated financial value. An abstract standard backing is required to fulfill the task of measuring IA. Attribution of Income IA can be attributed and recognize by measuring normalized operating income and subtracting the portion of income attributable to other classes of assets. This is a generalized value model that is based on less assumptions. It, too, can be located at Y=100.Discussion of exadigging the range of measurements available for Intangible Assets On the axis of measurement (Y in this paper), some possible maculations can be plotted first, measuring cost is the GAAP derived method (Y=0). For example, historic cost of training, benefits and other outlays of resources can be mass to measuring the intangible value of Human Capital, as an asset. Of course, whether such measurement can be recognized or reported must be construed on the various(prenominal) X and Z axis, as presented elsewhere herein. The historic cost measurement will be on the 0 point of the Y axis (Measurement).In contrast, at the maximum point on the Y axis (Y=100), we plot the concept that allows any proprietary value model. Whether it is acceptable as consistent (read GAAP compliant) or not, value models are available for managers and users of financial information on any IA-based event. Data mining and computer-oriented accounting information system make creating such models a comparatively easy task, albeit a proprietary tool for the reporting entity or industry. Appraisals were often hailed as the magic bullet for such metric setting and some faculty set that to be the magic (Y=50( on the Y axis.But, as shown earlier in this presentation, appraisals are simply value models that have been warranted or certified and are founded on their own (multiple) assumptions. Because applying the right mix of different appraisals methods, human appreh ension and experience causes variation in the consistency of this valuation? xxii, appraisals can not be a consistent or reliable method of measuring IA. Thus, appraising an IA receives a mark of 90 on the Y axis. As alternative of future benefit inflow models, a (real-options( model is also available to some small relief of the issues.Real Options, too is set at Y=90. Recognition of Intangible Assets Recognition of Intangible Assets There exists a notion that recognizing IA is a threat to proper disclosure of current detail expenditures capitalization of certain outlays can be seen as a scheme for expense deferral, designed to enhance the perceived value to creditors (shareholders et al). Proper classification, processing and reporting structures designed to deter such inappropriate reporting can be effective. Overall, requiring additional disclosure can only enhance the utility of the financial report to its users.On the other hand, it is easy to prove logically (see Appendix) t hat IA should be recognized, assuming that it can be powerful and consistently measured. The argument for capitalization essentially shows that if one assumes that (1) A participation must have a growth factor ((gamma() in its assets in order to survive (2) Outlays of assets (cash) in period N reduces righteousness in period N (3) If (gamma( is present then recognizing outlays as expenses in period N understates Equity in period N Therefore, the recognition of expenses is inaccurate, and the capitalization of these outlays is required.In this paper, the X axis will become the range of possible recognition treatments of IA. In general, several points of view are identifiable on this axis. Currently, GAAP does not allow for recognition of IA (except Goodwill from purchase transaction) either because of the wangle test? xxiii or because of the measurability test (measurability pertains to the Y axis in this model). An opposing view is presented states in essence that IA are either any excess of market value over book value, or that get income, before depreciation, amortization, and taxes (or some other similar representation of operating income) can be allocated(? xxiv to the different asset classes fixed, financial and intangible. Finally, using a completely projectionist method future cash flow as the value of an IA (perhaps in conjunction to subtracting the adjusted-basis and adding the disposal value) efficiency allow non-GAAP recognition of an such an IA. GAAP Recognition Currently GAAP contains no recognition of IA, other than Goodwill as provided by GAAP. As discussed in the measurement section, above, Goodwill is recognized only under certain purchases where certain tests of the excess of FV over AB are present, giving rise to Goodwill.However, Goodwill is often realize and recognized when another class of IA should be created, instead. Goodwill is realized and recognized due to an excess of a purchase consideration over FV (GAAP). This excess, how ever can be disaggregated or class more finely than simply calling it Goodwill Take for example a hypothetical acquisition of a Value Added Network (VAN) provider by an Internet assist provider (ISP). The former provides the communication tools, the phone lines and the data traffic from customer(s homes to the Internet.The latter, the Internet Service Provider, can benefit from this acquisition by avoiding renting the VAN(s and instead capitalizing on the acquisition(s future cash in flows. Moreover, the ISP can direct its customer base to use VAN as a preferred channel, creating certain loyalties, tractability (for the customers) and other added value benefits. Assuming under GAAP that the ISP paid the VAN(s shareholders more than the FV of their stock, an entry for Goodwill is required.However, this entry is a misnomer the Goodwill is not genuinely for the excess value but for the additional structure capital (SC) of the acquiring entity. Mostly, the VAN(s organizational str ucture can benefit from this excess (only in vicarious order is the future cash inflows of the acquired VAN to the ISP. ) Because Goodwill is the only GAAP compliant IA combined with its possible vagueness or generality, it receives a position of 0 on the X axis.Recognizing only Marketable IA This method allows for some parallel in recognizing certain IA, for example, patents, copyrights, and contractual leverage (with employees, suppliers or customers). Using this method excludes most internally generated IA because their effect is not legally binding. Recognizing IA based on their enforcability and to some degree, marketability gets placed at X=50. Recognizing All Events Some knowledge based essays argue that all events in a business entity is one of IA. As such, all otherwise not measured events can be considered intangible and once measured, recognized on the entity(s books.Because it is the most relaxed method, recognizing all non-financial events in an index or model of fair value? xxv obtains X=100. recap Valuation & Recognition Valuation and Recognition of IA has yielded a two dimensional plain on which different methods are available. At the most conservative level, GAAP driven, is the point (X=0,Y=0) which asserts that measuring asset must be according to the past-event principle (historic cost) and that with the exception of Goodwill, no internally or externally generated IA are accounted for.Departing from this basis, on the valuation scale (the Y axis) are proposed method of measuring the value of IA ((future cash flow(, (appraisal( or (real-option( models) make an interesting combination. For example, assume the point (X=0,Y=100) on the X,Y plain is proposed and accepted. This means that a only historic cost (X=0) is realized and yet, that future cash flow (Y=100) is used for measuring the value of these asset. Thus, any hybrid of such a nature (cell D in the plug-in I) of conventional measurement and unconventional recognition poses the chall enge to the third axis in this paper presentation of IA. Recognition X=0 X=50 X=100 Valuation (A) (B) (C) Y=0 ( IA not recognized? 2 ( Select IA recognized, based on ( All events recognized, if not ( Historic comprise market, contractual. sort out elsewhere they are IA ( Historic approach events ( Historic salute Y=85 (D) (E) (F) ( IA not recognized ( Select IA recognized, based on ( All events recognized, if not ( Real option valuation model market, contractual. categorize elsewhere they are IA ( Real option valuation model events ( Real option valuation model Y=90 (G) (H) (I) ( IA not recognized ( Select IA recognized, based on ( All events recognized, if not ( Appraisal (cost, market, income market, contractual. classified elsewhere they are IA approaches) ( Appraisal (cost, market, income events approaches) ( Appraisal (cost, market, income approaches) Y=100 (J) (K) (L) ( IA not recognized ( Select IA recogniz ed, based on ( All events recognized, if not ( Proprietary Value Model market, contractual. classified elsewhere they are IA ( Proprietary Value Model events ( Proprietary Value Model Table I ware of measurement and recognition approaches for IA? 3 Presentation of Intangible AssetsThe issue of possible presentation of IA as part of a financial statement must be addressed by the Reporting utilization that such a report contains. zero(prenominal) specifically within the scope of GAAP(s IA (other than Goodwill) are vaguely bring out in the financial statement. As research shows, some Securities and Exchange rush regulated corporations go Goodwill in aggregated format, while others disclose the underlying detail. Moreover, the other (disclosure( of IA, specifically to the external user, is done by the Management Discussion and Analysis (MD&A) that accompanies most financial statements of publicly held entities. However, MD&A is a really only another form of appraisal, and not apathetic at that, in relation to IA valuation.In reference to accounting for IA, MD&A is inapplicable as interpretation of the value, structure and other forms of unrestricted (and unaudited) material statement can become vague in its gist to external users. It is important to note that the internal users of a financial statement are slightly better equipped to properly ascertain the meat in the financial report internal accounting practices, cost management and non-financial reporting facilities can aid an internal user to better suppose the weight and context of an IA reference within the financial statement, be it a Goodwill or otherwise disclosed IA. The current GAAP disclosure practice (but not requirement) is at the lower end of the Z axis (Z=0).Under GAAP, a balance sheet of a corporation that might have intangible resources at its disposal might be presented in the following way (example 1) Balance Sheet, GAAP Driven Assets $ pace Liabilities (100) Equity (900) Example 1 GAAP Driven Balance Sheet sub inclusion of any intangible resource available to a company is in contrast to the current GAAP treatment. A complete inclusion of non-required disclosure of IA is at the farthest end of the Z axis the concept of full integrating of IA in the financial reporting (Z=100) . Of course, this in itself is a valid notion because full disclosure of IA represents expressing mostly relevant information to the user of the financial report. ? 4 Relevance however, has a trade off with accuracy. The relevance of including any and all IA in a financial statement might hinder on its accuracy the example below makes this point. just integration of IA in a financial report can lead to a balance sheet of the following format (example 2) With Considering IA, collar Inclusion Assets $1500 (capture events related to both tangible and intangible resources) Liabilities (100) Equity (1500) Example 2 Complete Inclusion driven Bala nce Sheet A possible over-statement of Assets by $500 exists under a complete inclusion method, which is most permissive in relation to GAAP. This type of presentation contains all resource-based events pertaining to the business at hand. It includes both financial and non-financial events pertaining to the entity. Some of this superset(s contents are IA that are externally or internally generated. For example, employee loyalty or positive media coverage are non financial events that hit its financial position.A possible reconciliation between the requirements to present certain financial statement elements (such as fixed assets, financial assets, current and non current liabilities, shareholders( capital et cetera) can be obtained in a horizontal surfaceed financial report. The concept behind a scoreed financial report is that the pump of any financial report must be GAAP driven. Its benefit to any user must continue in order to provide consistent, accurate and standardized lan guage of communication of a financial position. Within this marrow squash, GAAP reporting is one where the balance sheet presents the assets and the claims against them. This fundament is in turn included in a bigger set which can include not only cost-related assets but value driven assets, i. e. IA. Conceptually, IA that provide a growth factor (recall gamma 1) is meaning(prenominal) to the financial position of the reporting entity.For example, suppose an internally generated IA such as organizational structure or shared knowledge exist (assuming it can be valued and recognized). Under GAAP IA are not attributed to growth of several periods (by definition, growth is the increase of the value of an asset between back-to-back periods). However, for the users of the financial statement, the information about such growth is important in making educated decision about the going concern and prospects of the entity. Thus, the compromise format of financially reportable events includ es a degree of IA-related events that can affect a reasonable user(s decision-making process. This type of reporting mechanism is about mid-way between GAAP and Non-GAAP reporting format, at Z=50.An example of a tiered balance sheet follows (example 3) Without Considering IA With Considering IA, Tiered Format N/A Intangible Asset $300 (Note Recognize IA events based on historical ost) Assets $1000 Assets 1000 Liabilities (100) Liabilities (100) Equity (900) Equity (900) N/A Equity Attributed to Intangible Asset (300) Example 3 (Padded( Balance SheetIn essence, this type of (padding( of a balance sheet is derived from the set concept introduced above. The (core( statement, consisting only of Asset, Liabilities and Equity, clay intact. An extended set of financial events allow further disclosure of the financial effect of IA (in this example, by using the most aggressive GAAP-departure valuation method). Recapitulate Recognition and manife stationRecapitulate Recognition and Disclosure Just as Valuation and Recognition can be plotted on a two dimensional plain, so can the axis of Recognition and Disclosure. Overall, the X,Y and Z axis allow us to examine the problem at hand on a three-dimensional basis.The intersection point of the Recognition alternatives in relation to the Disclosure alternatives follows Recognition X=0 X=50 X=100 Disclosure (M) (N) (O) Z=0 ( IA not recognized ( Select IA recognized, based on ( All events recognized, if not ( No GAAP required Disclosure, market, contractual. classified elsewhere they are IA events only discretionary MD&A ( No GAAP required Disclosure, only ( No GAAP required Disclosure, only discretionary MD&A. discretionary MD&A Z=50 (P) (Q) (R) ( IA not recognized ( Select IA recognized, based on ( All events recognized, if not ( timeworn ((Padded() monetary market, contractual. classified elsewhere they are IA events Report ( devolve ((Padd ed() Financial Report. ( Tired ((Padded() Financial Report Z=100 (S) (T) (U) ( IA not recognized ( Select IA recognized, based on ( All events recognized, if not ( secure financial incorporation market, contractual. classified elsewhere they are IA events of IA undefined ( spacious financial incorporation of IA. ( Full financial incorporation of IA Table IIIntersection of measurement and reporting approaches for IA. Cells M-U describe the X,Z plain (the letter are assigned sequentially).To complement tables I and II, the intersection of valuation alternatives and disclosure methods available are included in Table III Disclosure Z=0 Z=50 Z=100 Valuation (V) (W). (A1) Y=0 ( No GAAP required Disclosure, ( Tired ((Padded() Financial Report. ( Full financial incorporation of IA only discretionary MD&A discretionary MD&A. ( Historic Cost ( Historic Cost ( Historic Cost Y=85 (A2) (A3) (A4) ( No GAAP required Disclosure, ( Tired ((Padded() Fina ncial Report. ( Full financial incorporation of IA only discretionary MD&A ( Real option valuation model ( Real option valuation model ( Real option valuation model Y=90 (A5) (A6) (A7) ( No GAAP required Disclosure, ( Tired ((Padded() Financial Report. ( Full financial incorporation of IA only discretionary MD&A ( Appraisal (cost, market, income ( Appraisal (cost, market, income ( Appraisal (cost, market, approaches) approaches) income approaches) Y=100 (A8) (A9) (B1) ( No GAAP required Disclosure, ( Tired ((Padded() Financial Report. ( Full financial incorporation of IA only discretionary MD&A ( Proprietary Value Model ( Proprietary Value Model ( Proprietary Value Model Table IIIIntersection of measurement and disclosure approaches for IA. DiscussionDiscussion The problem of Intangible Assets revisitedConceptually, the accounting for IA is at the heart of the mannequin that links the Balance Sheet and the Income Statement at its core the bal ance sheet is a statement of resources while the income statement is a an human face of the utilization of these resources (tangible or otherwise available to the entity). Coupled, the traditional balance sheet and income statement includes only tangible resources. However, the traditional Income Statement includes activities that stem from using all available resources. In the asymmetry lies the reason for inclusion of IA resources on the Balance Sheet. For example, outflows for compensation is often the single largest expense of a corporation. Yet, employee knowledge, or other types of Human Capital are rarely disclosed. Further, any activities that are profitable, i. e. where the growth factor ((gamma() is greater than 1, are attributed only the tangible resources. Classes of Intangible AssetsIA can be divided to two classes resources that are within the control of the organization and resources that are only partially within the control of the organization. To retain a mathema tic model, we can introduce OC, Organizational see, such that For IA such as Customer mingy and Customer Relations Index, Vendors( Credit and Trust, Internal output signal or Service Procedures, OC = 1. 0, i. e. there is complete control over the resource, which is an intangible asset For IA such as Human Skill Level , Employee gratification and public Relation Index ((Public Image(), OC 1. 0. The following is an imaginary yet possible comparison of two companies that might have different levels of Organizational Control over their IA, classified according to their business type.Table IV is an congressman of OC levels (Tobacco and food conglomerate((Northeastern Ice-cream Manufacturer( Organization Control Level = 1. 0 Customer Base 1. 0 1. Vendor(s Credit 1. 0 1. 0 Internal Production Procedures 1. 0 1. 0 Organization Control Level 1. Human Skill 0. 9 0. 7 Employee Satisfaction 0. 8 0. 8 Public Image 0. 5 0. 9 Table IVThe (determined) values of Organizational Control (OC) over Resources We assume these values derive from internal yet consistent studies and valuation, we can see that for the first three (classified as IA over which the entity has complete control) the OC value remain 1. 0. This simply indicates an existence of an IA (completely within the company(s control). The second group of so called (assets( (or generally resources) are not completely within the control of their respective entity. We can say, perhaps, that the ice cream factory workers need less training than the tobacco production plant workers but that they are equally satisfied.Further it is clear that the tobacco conglomerate has less leverage in their public image (OC = 0. 5) than the ice-cream maker (OC=0. 9). The important point about all these resources is that the entities are not controlling the value drivers. Therefore, for example, their public images is different and it can not be enlisted as an (asset( because it is outside the scope of their respective control. ? 5 The three sets of resource group can be summarized as follows The most inner core of assets that are GAAP driven Tangible Assets that are at the core of the Income Statement and Balance Sheet pair. These assets produce tangible activities such as cash (inflow) or products (output).The intermediate outside tier consists of resources that are richly under the control of the entity, therefrom they can be classified as Assets, albeit intangible they too produce activity such as competitive edge (HC) and customer loyalty (SC). In contrast to HC and SC, the outmost tier class of resources are intangible resources that are not fully under the control of the entity thus fail the control test of the definition of an Asset. In a sense, the inner set of Balance Sheet and Income Statement represent the fundamental analysis that an external or internal user of these statement might be interested in. Under this framework, fundamental ratios a nd projections are available in the most traditional sense. Extrapolating from that tier, the resources described as (true( Intangible Assets, i. e. hat they are measurable resources that occurred in the past and are within the entity(s full control, describe the effect of growth and going concern. Growth is indicative of innovation or competitive edge, while going concern is more general and encompasses other factors. In this vein it has been shown that IA are a source of both growth and continuity IA are key to strategic planning and success? xxvi. Resources such as reputation, employee know-how, and organizational culture were also linked to success factors of companies? xxvii. Finally, the outer tier of partially controlled resources can be described ( if so wished by the reporting entity ( as additional disclosure of interest to the user of a financial report.The outer tier is only marginally useful because of the need of full control the reporting entity might have over facto rs such as public image. It will be interesting to see if the two outer tiers of resources will play out in future disclosure the FASB is now encouraging companies to discloses elements of intangible assets in their financial reports. However, from a refresh of the two tiers it seems that disclosing resources in the intermediate tier can add to the reporting utilization of the entity(s financial report, perhaps if it is presented in a two tier Balance Sheet ((padded(, described earlier). Resources that are not within the complete control of the entity (the outer tier(s elements) will most likely not be disclosed.Assuming a valid and consistent index can be obtained (by an external review, for example), there can be usefulness to disclosing elements of intangible resources which are (true( IA such as index of customer base, customer loyalty and vendors( credit which reflect on a positive (going concern(. In contrast, disclosure of elements such as employee retention, public image an d human skill index, can provide external users a marginal utility regarding the activity and prospects of the entity. Conclusion Measurement of IA is the area where the disparity is widest (on the Y axis in this discussion(s three dimensions model). The alternatives to historic cost are valuations based on proprietary models or based on certified models. Both alternatives are insufficient because they require judgement which lead to substantial variation.Historic cost is most consistent but inapplicable because it can not measure certain IA such as customer base or affiliations and alliances. Therefore, an allocation approach is suitable computation the ratio of growth in equity to fixed, financial and intangible asset allows measurement of IA at least as a class of resources on the balance sheet statement? xxviii. Further discussion and research is required in order to properly weigh the specific intangible assets within this class, and thus compute the financial value attributed to it. Generally, the emergence of IA and in general, intangible resources, is unavoidable. The accounting profession should treat this type of financial event within its GAAP guidelines and not attempt to preclude it from recognition.Plainly, accounting for IA by including it in the financial statement (specifically, as part of the Balance Sheet) is not helpful to the external user. Such recognition will simply inflate the value of corporations and will cause comparisons to be more difficult and the financial statement viewed more skeptically. However, by methodically presenting IA in a tiered manner, users of the financial statement can view the traditional fundamental (current) GAAP elements as well as supplementary elements. In a sense, allowing companies to literally (pad( their balance sheet with separate IA and IC (Equity due to IA) will put to a (vote( of the external and internal users the concept of systematic disclosure.To wit, instead of a honorable recognition in the M D&A section or a buried treasure in the footnotes to the financial statement, disclosing IA on the face of the balance sheet, without cut its existing utility, might be a solution to the emerging need to report IA as a financial event. References pic pic 11IA are often designate knowledge assets. lots has been written about a knowledge parsimoniousness and some attempted to define all resources as knowledge-based. The device in which this is possible is usually illustrated by an example of an organization that can be described all in terms of knowledge. Such zeal is convincing only to the extent that a counter example is not produced. Knowledge is information produced by data and ideas.Transforming knowledge to a benefit producing resource ((value() converts knowledge to an IA. Thus, in terms of scope of valuation of IA, not all business process are considered IA only business processes that have not been measured or presented elsewhere can be considered measurable for purposes of this discussion. 22In all the instances of Y=0, IA is not recognized except for Goodwill in purchase. 33The novel FASB sponsored attempt to account for certain types of IA by rules of annual impairment valuation (read appraisal valuation method) is position in box (B( of Table I using historic cost and a (certified) appraisal of fair value of an IA to trigger both valuation and recognition. 44However, (strange bedfellows( effect might occur if we simply plot the Z axis against, say the Y axis (measurement) the point (Y=0, Z=100) yields an IA that (is not recognized (Y=0)( and (integrated in the financial report( (Z=100). Therefore, at least from a practical point of view, these type of pairing with GAAP (Y=0 and Z=100) can not be used for our analysis this point in our exploration model is undefined. 55It is the public, the society in which they operate for example, that determines which company is the (Kind American Corporation( and which is the (Evil American Corporation. ( ii . ABI-Inform is available via the Internet from ProQuest Information and Learning Company. iiii. trueness of the yield and direct capitalization methods A twenty-year empirical study of the voltaic utility industry( Assessment Journal Chicago Richard R Simonds Vol. 6 No. 4 pp. 49-55 iiiiii. Internet available www. dictiornary. com. Source of this citation 1997 Princeton University. iviv. Internet available www. dictionary. com. Citation source The American Heritage Dictionary of the English Language, quaternary Edition. vv. FASB presentation, Nakamura in 4th Annual Intangible Assets Conference, Ross Institute, modernistic York University, whitethorn 2001. vivi. Financial Accounting Standards Board Special Report Business and Financial Reporting, Challenges from the reinvigorated Economy Wayne S. Upton, Jr No. 219-A April 2001 p. x (Executive Summery). viivii.Lynn, Bernadette, CMA Intellectual Capital Key to Value added Success in the Next Millennium Society of Management Account ants of Canada, CMA Magazine. getable Internet http//www. cma-canada. org. viiiviii. Lynn, Brenadette. ixix. Data is the superset of information which in turn is the super set of knowledge. Purposeful and formal conversion of data to information and information to knowledge, creates Intangible Capital, which can be leveraged. xx. Berry, John MIT, Wharton Search for IT Asset Metric Internetweek Manhasset Feb 5, 2001. xixi. ( sign assets and patents are knowledge assets, not just technology(. Companies May Be unknowingly Ignoring The Bulk of Their Asset Value Investor Relation Business New York Dec. 3, 1999 p. 4. xiixii. Hal Varian How Much Information is Produced Worldwide? University of Berkeley Presented in the 4th Intangibles Conference at New York University, hobo School of Business, Ross Institute of Accounting Research May 2001. xiiixiii. Christopher Tucci The Value of Collaborations and Alliances New York University Presented in the 4th Intangibles Conference at New York Un iversity, Stern School of Business, Ross Institute of Accounting Research May 2001. xivxiv. FASB Special Report Chapter 2. xvxv. John Rutledge, You(re a Fool if You Buy into This One Available ABIinfrom. xvixvi. Alfred M. King, Jay M. henry Valuing intangible assets through appraisals Strategic Finance Vol. 81, No. 5, Montvale Nov. 1999. pp. 32-37. xviixvii. Alfred M. King, Jay M. Henry, Strategic Finance, Nov. 1999. xviiixviii. Lawrence C. rosiness Accuracy of Appraisers and Appraisal Methods of Closely Held Companies Entrepreneurship possibility and Practice (ET&P) Vol. 17, No. 3 Spring 1993 pp. 21. xixxix. FASB Special Report p. 39 xxxx. Alfred M. King, Jay M. Henry, Strategic Finance, Nov. 1999. xxixxi. Wiley A. Scott, Jr. Borrowers( Intangibles May be Off-Balance-Sheet Gold Commercial Lending Review Vol. 9, No. 3 Boston Summer 1994, pp. 26. xxiixxii. Lawrence C.Rose Accuracy of Appraisers and Appraisal Methods of Closely Held Companies Entrepreneurship Theory and Practice (ET &P) Vol. 17, No. 3 Spring 1993 pp. 21. xxiiixxiii. FASB Special Report Chapter 4. xxivxxiv. Lev, Baruch. xxvxxv. IAS 36 defines (value in use( as (future cash flows expected to arise from the continuing use of an asset. xxvixxvi. Joseph A. Patrick et al Global Leadership Skill and